TJN's new transfer pricing project

The Tax Justice Network is launching a new project on transfer pricing and mispricing. This is an issue of paramount importance: estimates by Global Financial Integrity, Christian Aid and others show that hundreds of billions of dollars are estimated to be shifted out of developing countries each year by this method alone. It is also a major problem for developed countries, as multinationals use transfer mispricing to shift income to low tax or no tax jurisdictions.

This major new project will be led by some of the world’s experts in this field, and before too long we will be seeking to produce substantive materials on this subject as a basis for further work and discussion. The transfer pricing project will complement an ongoing campaign by TJN and other organizations and governments in favor of country-by-country reporting.

Currently we have several individual experts who have made commitments to getting involved in this project, and we have made initial contact with organisations who may be interested in taking part in this crucial issue.

Individuals and organisations are welcome to participate. Please contact TJN if you would like to be involved in this ground-breaking initiative.

CDC: going offshore to help the poor?

In 1948, under the premiership of Clement Atlee, the British Government created CDC (the Colonial Development Corporation). Being pretty much what it said on the tin, CDC's initial mandate was to strengthen the economies of the former UK colonies by providing finance for businesses.

In following decades CDC changed its name to Commonwealth Development Corporation and invested directly into emerging Commonwealth businesses, helping to provide financial backing in sectors which purely commercial investors wouldn’t touch. The result was important: the development of business and industry in territories which otherwise struggled to attract investment, and so languished in poverty. In 1969 it was given the authority to invest outside of the Commonwealth, thus extending its programme of assistance to some of the poorest nations in the world.

For decades CDC was a feather in the cap of the British Government. Quasi-independent as a statutory corporation, it was closely affiliated with the ODA (Overseas Development Administration), a wing of the Foreign and Commonwealth Office. From 1948 to 1997 CDC invested directly in emerging economies, aiding the development of some of the most deprived places on Earth.

The election of Tony Blair in 1997 marked a sea change in British development policy. The ODA was renamed DfID (the Department for International Development) and CDC was transformed. Renamed and reclassified as CDC Group Plc, it ceased to be a statutory corporation and became a Public Private Partnership. CDC is now an “arms-length corporation” – Dfid owns it outright, but CDC’s board of directors are independent. Dfid will occasionally “direct” CDC – but for the most part it operates as an independent company.

This was Blair’s continuation of privatisation policies, applied to international development. Rather than investing in the developing world directly, since 2004 CDC has been directed to act as a global “fund of funds” in the private equity market. This means CDC’s role is to invest money in “fund managers”, who are charged with investing that CDC money (plus other money they can raise from private investors) into “investee companies” in developing nations. The fund managers receive a rate of return on their investments in investee companies, and a proportion of this is paid back to CDC relative to what was originally put in. This is the private equity model applied to international development.

The rationale for the switch is indicative of the fin-de-siècle consensus. Direct investment was seen as out-dated, and development was thought best achieved via speculative investments motivated by maximisation of returns. The system that (until August 2007) seemed to be working so well for global laissez faire capitalism.

But does this model work for international development? It depends what you mean by “work”. CDC has done extraordinarily well since 1997 – in terms of generating returns on its investments. It has beaten the market every year except 2003 (which, strangely enough, was the year before independent and privately controlled investment fund Actis was spun out of CDC, and 60% of its shares sold to former CDC affiliates for the bargain price of £340,000).

Despite having a torrid year in 2008 – and given the global economic meltdown, that is hardly surprising – it still outperformed the market indices. When the Public Accounts Committee published its report on CDC in April of this year, CDC was sitting on a whopping £1.4billion of un-invested cash, and from 2004 to mid-2008, CDC’s net assets had more than doubled from £1.1billion in 2004 to £2.7billion.

Considering CDC had been loss-making on average for 8 years prior to this, it appears that the private equity model is working well - for CDC. Whether it’s working well for developing nations is another question entirely. CDC claim that:

Our investment is aimed at the private sector, as the engine of growth. The scarcity of long term risk capital, particularly equity capital, is one of the factors which constrains the private sector in the developing world.[1]

Accordingly it can be argued that private equity investment is essential to development: no private equity, no private sector growth, no development. Yet the House of Commons Public Accounts Committee 2009 report on CDC was unconvinced that this approach was yielding significant gains in poverty reduction:

Although CDC invests more of its resources in poor countries than any other Development Finance Institution, there is limited evidence of CDC's effects on poverty reduction.”[2]

The reasons for this are multiple. Partly, there has been some evidence that CDC’s fund managers have targeted nations like China and India which, whilst classed over-all as developing, have pockets of business and industry which are already extremely developed – and offer attractive rates of return to the private investor. As the PAC noted:

Since 2004, a growing proportion of CDC's portfolio...has been deployed in Nigeria, South Africa, India and China. These countries contain some 62% of the world's poor and include some very poor districts, but they also contain well established locations for foreign private investment. Because CDC uses fund managers to invest on its behalf, it has less ability to direct its money to disadvantaged districts within a country than if it were a direct investor identifying its own opportunities using its own staff...[W]hen funds come up with first-class commercial propositions in urban areas, CDC is constrained as to how far it can direct the fund managers elsewhere.”[3]

In fairness to CDC, post 2009 its investments are to be directed increasingly out of India and China – but the fundamental problem of how to target investment remains.

For it remains unclear whether investing in independent fund managers is a productive way to generate development. A fund manager’s goal is to maximise returns to an investment. This means investing money where it’s likely to make the most profit – and there’s no guarantee that the investments which turn the most profit are those that do the most to alleviate poverty. As a purely hypothetical example, imagine I’m a fund manager and I can choose to invest (using, in part, money invested in me by CDC) in either a golf course in Kenya, or a water sanitisation plant in Liberia. The former is likely to yield higher returns than the latter – so which do I go for?

The problem is, CDC can’t direct me to invest in the latter on the grounds that it’s most conducive to development. CDC doesn’t do that, under the private equity model. It simply puts money in fund managers, who then put it into investee companies in the developing world. Of course, if you are of the opinion that “all investment is equal, because all investment leads to development”, then you’ll have no problem with this model. If you believe that investing in water sanitisation is manifestly more conducive to development than investing in golf courses, then the hands-off CDC approach may seem considerably less desirable.

And it gets even trickier. CDC claims that:

We require all our fund managers to subscribe to our best practice policy covering health and safety, environmental, social and governance issues.

Which sounds very grand. But the problem is, CDC has no mechanism – as far as this blogger is aware - for ensuring that their fund managers do comply with these “best practices”. To this blogger’s knowledge, there is not one single example of CDC withdrawing funds from a fund manager on the grounds of violation of “best practice policy”.

Although CDC has some knowledge of the investee companies its fund managers use, it’s not clear that CDC money isn’t finding its way into investee companies that exploit their workforces by, for example, paying them slave wages or forcing them to work in unsafe conditions. Again, it must be stressed: we do not know that this is the case – we simply lack a guarantee that it is not the case. And that is worrying.

Of course, if we were able to obtain the accounts for CDC’s fund managers’ investment companies, then we’d be more able to check that the businesses receiving CDC cash are scrupulous. Yet appeals to CDC for investee company accounts will result in your being told that either CDC don’t hold the accounts or that even if CDC does hold the accounts, it can’t release them due to commercial confidentiality.

This argument is not completely implausible. So, naturally, one applies to Dfid – CDC’s 100% shareholder – for the accounts. Except that won’t work either. All Dfid will provide is a sample list of CDC investee companies – and none of them with accounts.

If these investee companies were UK registered companies, their accounts would be a matter of public record – but they’re not, so they’re not. Yet this lack of accounting transparency points to another dark patch in CDC’s present constitution.

As a development organisation which ostensibly exists to alleviate poverty, CDC will no doubt agree that taxes are essential for development. The governments of developing nations need secure tax revenues so that they can invest in the basic infrastructure required to move out of poverty.

However, at present we have no guarantee that CDC’s investee companies are paying their fair share of taxes in developing nations – how can we, when we don’t have their accounts? CDC has claimed that it’s 600 plus investee companies paid £250 million in tax to developing nation governments[4] - but this figure is based on information supplied by fund managers.

Information which – without the relevant accounts – CDC simply cannot verify. How many CDC investee companies are shifting their profits off-shore, depriving developing world governments of much-needed revenue? We simply don’t know. But given the prevalence of tax avoidance and evasion in many developing nations – which are estimated to lose revenue amounting to $160 billion annually just arising from transfer mispricing and false invoicing – the fact that we don’t know is cause for alarm.

And it’d doesn’t stop there. According to the PAC report, 40 of CDC’s 72 fund managers are themselves based offshore[5]. CDC claim that this is because:

The reason for investing through offshore centres is to help attract third-party money to increase the amount of long-term capital invested in developing countries. This is a common way of structuring private-equity investment involving investors from different tax jurisdictions to make sure they do not get taxed twice.[6]

We might be a little quizzical at CDC’s insistence that investors don’t get taxed twice – after all, if tax promotes development, does not more tax mean more development? In fairness, CDC might reply that such gains would be more than offset by the discouragement of investors who don’t want to be taxed twice. But that is the purpose of having double taxation agreements, which now cover most countries.

Yet there is a deeper problem here. CDC is a development organisation, but it invests money in fund managers based offshore in tax havens (we prefer the term "secrecy jurisdictions") despite the fact that secrecy jurisdictions are at the heart of the processes of capital flight, which is the very antithesis of development. It’s through secrecy jurisdictions that corporations and individuals remove wealth from developing nations and spirit it into western bank accounts. According to PERI (the Political Economic Research Institute at University of Massachusets, Amherst) the scale of outbound illicit financial flows from Africa runs to hundreds of billions:

Real capital flight over the 35-year period amounted to about $420 billion (in 2004 dollars) for the 40 countries as a whole. Including imputed interest earnings, the accumulated stock of capital flight was about $607 billion as of end-2004.

Again, we cannot prove that CDC’s investee companies or fund managers engage in tax avoidance and evasion, or that they facilitate capital flight out of the developing world.

Of course, if CDC or Dfid revealed the investee company accounts, we’d be closer to knowing one way or the other. In lieu of such disclosure, we must raise serious questions about the consistency and appropriateness of a development organisation which sees fit to put money into fund managers based in secrecy jurisdictions, who invest in companies whose accounts we are denied access to.

We must ask whether this is really the most appropriate development strategy Britain can pursue in investment terms – and what sort of a message we are sending to the rest of the world.

And we must wonder why CDC continues to put money into the offshore system, 10 years after then Minister for International Development Claire Short said this:

It is obvious that the CDC has to be able to compete with offshore funds, if it is to achieve its goal of investing in developing countries using capital raised in a competitive private investment market dominated by offshore funds. From the start, it was clear to me at least that it would be unacceptable for a major instrument of the UK's development policy to be based offshore.”[7]


SOURCES:
[1] http://www.cdcgroup.com/development_philosophy.asp
[2] http://www.publications.parliament.uk/pa/cm200809/cmselect/cmpubacc/94/9404.htm
[3] http://www.publications.parliament.uk/pa/cm200809/cmselect/cmpubacc/94/9406.htm
[4] http://www.publications.parliament.uk/pa/cm200809/cmselect/cmpubacc/94/9405.htm
[5] http://www.publications.parliament.uk/pa/cm200809/cmselect/cmpubacc/94/9405.htm
[6] http://www.guardian.co.uk/business/2008/nov/24/taxavoidance
[7] http://www.publications.parliament.uk/pa/cm199899/cmhansrd/vo990524/debtext/90524-11.htm

Is the United States at war with Switzerland?

Three recent articles highlight the hostilities that have broken out between Switzerland and other countries, not least the United States. For the record, we're firmly on the Americans' side on this one. First, from the FT:

"An economic war has broken out between Switzerland and the rest of the world after the crackdown on Swiss banking secrecy, according to one of Geneva’s leading private bankers. . . . “There is a feeling in the banking community, and also in the population . . . that we are in an economic war. . . . We understand that we are in an economic war and we have our own weapons,” he added."

Let's get one thing clear first - if there is a war, the Alpine protagonist is not Switzerland, but a certain section of Swiss society and politics; many and perhaps a majority of Swiss don't like the stink of bank secrecy. Yet the banker, Pierre Mirabaud, did make a point that we agree with, however: the United States (not to mention Britain and with its many offshore satellites) are hypocritical when they point the finger at the Swiss, as Mirabaud points out:

"There is nothing easier than doing tax evasion in the US. Look at Delaware companies or trusts in the Channel Islands."

Indeed. But now here's something else. It's an article by Marty Sullivan in the high-brow tax publication TaxAnalysts - we blogged it already - and we now reproduce it in full, with their permission. It's well worth reading all of it, (it's not that long), as it helps explain some of the issues clearly. It contains gems such as this, in reponse to Swiss claims about the importance of "privacy":

Privacy is nice. But let’s just say two things. First, if by some miracle the IRS does obtain information about off-shore accounts held by U.S. citizens, it won’t broadcast it over the airwaves. It would be covered by the same severe restrictions on disclosure of taxpayer information that applies to all domestically obtained information. Second, if privacy is so paramount in importance, why are we enabling it only in offshore jurisdictions? Should we repeal information reporting requirements for domestic banks?"

On the same subject, we finish this blog with a statement from our friends at Global Financial Integrity in Washington, entitled "U.S. Justice is Not for Sale, DOJ Must Pursue Case against Swiss Bank UBS, Says GFI". As it says:

"Global Financial Integrity (GFI) urges the U.S. Department of Justice (DOJ) to remain steadfast in its pursuit of information about the suspected 52,000 secret bank accounts held by U.S. citizens with Swiss bank UBS.

“This is about bringing to justice tens of thousands of tax-evading Americans and making it clear that the U.S. will no longer tolerate this type of behavior,” said GFI director Raymond Baker. “If we let UBS off the hook with a fine we’re letting the world know that U.S. laws may be flouted, bent, or just plain broken provided you have the cash to pay your way out of trouble.”

Mr. Baker also noted that the U.S.-Switzerland Tax Treaty agreement reached earlier in the month would do little to help tax authorities investigate and prosecute cases of tax evasion.

“The wording of the new agreement states that an exchange of information on tax matters will still only take place in ‘individual cases where a specific and justified request has been made,’” said Mr. Baker. “To see the shortcomings of this agreement just apply the new standard to the current case. U.S. authorities, under the new agreement, would have no additional capacity to obtain information than they do now. In the case of investigating banking secrecy, generating a ‘specific request’ is impossible.”

DOJ is expected to make its next court filing today, followed by a court hearing July 13."

Shadowing the G-8

How the mighty are fallen. G-7 was once the colossus that ruled the world. When Russians bigged-up on oil and gas wealth they were invited to the table. And then the financial markets went pear-shaped and suddenly the G-8 didn't look quite so clever any more. G-20 became the new kid on the block, and all the king's horses and all the king's men won't be able to put the G-8 together again. G-8 meets in Italy next week, under Silvio Berlusconi's presidency, and this is likely to be a major non-event.

Anyway G-8 has a shadow. Chaired by Nobel Laureate economist Joseph Stiglitz, a group of non-aligned civil society experts meets as G-N, and they have just issued their proposals for tackling the crisis and creating a more cohesive world. You will find their report here.

The group includes our colleague and senior adviser Valpy Fitzgerald from Oxford University, and it comes as no suprise to us that tax issues, and tax havens (mis-spelt here as heavens) feature prominently.

Here are some selected recommendations, but do read the report for yourself:

To reverse the trend in distribution, and hence to contribute to sustainingaggregate demand in the medium-to-long term, it is proposed as follows.

1- To increase the progressivity of the tax system, in particular for high and very high incomes. This should happen in a coordinated way to avoid excessive movement of highly-skilled workers.

2- Fight against tax heavens (sic) - in distinguishing between low tax cooperative jurisdictions and others - and, in general, increase the resources devoted to fighting tax evasion and lack of information sharing.

3- Introduce some sort of cooperation among countries to avoid tax competition, wage deflation and social dumping, the modern versions of beggar-thy-neighbour policies which were common in the 1930s.

@Silvio Berlusconi - if you aren't too distracted by your domestic political problems (and police women) pay attention to these recommendations. They apply to your country as much as any other.

Swiss bank secrecy - and Guantanamo

Martin Sullivan at Tax Analysts has pointed out critical factors impacting the political will to pursue, or to drop, the US Department of Justice case against UBS. In his article "News Analysis: Switzerland, Guantanamo, and Tax Evasion", Marty states his hope that "Justice will stick to its guns", yet adds:

"It makes so much political sense to appease the Swiss. The Swiss government announced in January that it would be willing to take some Guantanamo prisoners off U.S. hands -- providing much-needed relief for one of the superpower's biggest foreign policy headaches. The United States calls on Switzerland to represent it in countries such as Iran where the U.S. has no Guantanamo diplomatice presence. In this economic crisis and in coming years, good relations with the Swiss will be essential for multilateral actions to promote financial stability."

At the core of the DOJ/UBS dispute lies Switzerland's notorious Banking Secrecy. The DOJ is demanding release of information on an estimated 52,000 UBS customers who are US citizens. UBS says that this is a matter between U.S. and Swiss governments, because the release of account information by Swiss bankers without the explicit consent of their clients would mean that those bankers are breaking Swiss banking secrecy laws; the bankers would be committing a criminal act in their own country.

Good news so far is that the publicity on the potential alone for UBS releasing account information has encouraged scores of wealthy US individuals to come forward voluntarily to avoid possible criminal prosecution. These wealthy individuals include clients of additional financial institutions, beyond UBS. These events are also contributing to a groundswell of deterrence to potential tax evaders. Good so far, but as Marty states:

"... President Obama and Attorney General Eric Holder should understand that by vigorously pursuing the revelation of wealthy U.S. tax evaders using Swiss accounts, they have a unique opportunity to deal a serious blow to offshore tax evasion. By dropping the case, they would be giving it all away. And no matter how much they would argue to the contrary, they would be seriously backtracking on their oft-stated intention to crack down on tax haven abuse".

Well said.

Luxembourg refered to European Court of Justice

The European Commission refers Luxembourg to the European Court of Justice over its incorrect application of the Savings Tax Directive

The European Commission has decided to refer Luxembourg to the European Court of Justice over its incorrect application of certain provisions of the Savings Tax Directive as regards interest payments made to beneficial owners who benefit from so-called "non-domiciled resident" status in their country of residence.

Luxembourg refuses to apply the Directive to beneficial owners who benefit from the so-called "non-domiciled resident" status in their country of residence. Consequently, Luxembourg paying agents do not levy withholding tax on interest payments to such beneficial owners.

The Commission considers that Luxembourg's legislation, in its current state, is not compatible with articles 2, 3, 10 and 11 of the Directive that are fully applicable as they are not in the scope of the transitional period that apply for Chapter II (article 8 and 9) as defined in article 10 of the Directive.

Given that the above Luxembourg tax rules were not amended following the reasoned opinion sent by the Commission in November 2008 (IP/08/1815 ), the Commission has decided to refer the case to the European Court of Justice.

For further observations about this referral see here.

Parliamentarians should declare offshore interests

Here's an interesting new idea from Dan Hind, who makes the rather subversive suggestion that elected representatives should declare any interests in offshore holdings. In the case of the UK, for example, members of parliament should declare on the register of member's interests:

. . . information of any pecuniary interest or other material benefit which a Member receives which might reasonably be thought by others to influence his or her actions, speeches or votes in Parliament, or actions taken in the capacity of a Member of Parliament.

As Dan points out:

If we are to love and trust our elected representatives again - and how we long to do so - then it is necessary for us to know whether they have assets parked offshore, regardless of their provenance. Reasonable people can disagree as to whether the use of offshore facilities is consistent with working as a representative of the British people, but we must be able to go about our business secure in the knowledge that our MPs are not being bribed by shadowy business interests.

Now that would really stir things up for the trust fund boys (and girls) in parliament.

Letter from the UN in New York

Christian Aid's Dr David McNair attended last week's United Nations summit meeting on responding to the global crisis. Here is his letter from New York:

United Nations HQ is an odd place. A huge somewhat dated building full of bureaucrats and security guards trying at every stage to stop you from getting things done. Some would say it is a metaphor for the UN itself.

But the UN is crucial. For the reality is that there is no other truly representative international organisation where developing countries have a fair say over how the world is governed. I have come to the UN conference on the financial crisis and it's impact on development.

Negotiators from around the world meet months in advance to agree on a consensus document on how the UN will take the process forward. This is finalised at the conference.

Negotiations usually run to the 11th hour, and civil society representatives (like myself) run around frantically meeting officials and ministers, grabbing a moment in a lift or a coffee shop to try to persuade countries to push for stronger commitments.

Yet, following difficulties in the negotiation process and a postponement of the conference to give negotiators more time, there is a strange lull. The conference agreed to adopt a draft of the outcome document two hours after the conference started. The proposed document is both a great success and a great disappointment.

It is the first time the world's governments have agreed on a response tothe financial crisis and that is no small feat. Indeed the analysis of how the crisis occurred is spot on. Yet what is striking is the huge gap between the analysis of the problems and the commitment to do something about them. This is a once in a lifetime opportunity to reform the global financial architecture to prevent similar crises happening again. It has not been grabbed with both hands.

For the first time the G77 (the group of poorest countries) agreed a common position for the negotiations. They supported many of the progressive proposals put forward by a UN commission chaired by Nobel Laureate economist Joseph Stiglitz. These included an international court to deal with debt crises, a global economic coordination council to monitor systemic risk in the financial system, a new reserve system to minimise instability in global exchangerates and reforms to clamp down on tax dodging in developing countries.

Yet the rich countries, particularly the EU, have consistently blocked reforms going through the UN. They prefer the ad hoc group of G20 where their power over reforms is firmly cemented.

Christian Aid wanted to see firm proposals for clamping down on tax dodging from developing countries, started at the G20 London summit, taken into the UN system. Yet while the document recognises the importance of dealing with capital flight and tax dodging, the devil is, of course, in the detail.

Some countries lobbied hard to get the following language in to the document:

Inclusive and cooperative frameworks should ensure the involvement and equal treatment of all jurisdictions. We call for consistent and non-discriminatory implementation of transparency requirements and international standards for exchange of information.

This is diplomatic speak for slowing down the process and reaching the lowest common denominator in demanding transparency standards from tax havens. We have been lobbying hard for bringing developing countries into the process around tax transparency which is currently happening in the OECD (a rich countries club).

An ideal way to do this would be through an upgrade of the UN tax committee - a group of experts which is hugely under-resourced - to an intergovernmental body that would have the legitimacy to take the issues of tax cooperation forward in partnership with the OECD.

Yet treasury departments all over the world get nervous at the idea of the UN "interfering" in their tax affairs. This fear is somewhat misplaced. National sovereignty over tax policy is a sacred cow which every governmentwants to protect. But international tax cooperation is essential for this to occur. For in recent years, the globalisation of finance means that national tax policy is inadequate and the sovereign right of governments to tax economic activity occurring on their shores is routinely undermined by companies and individuals shifting money to jurisdictions where they can pay less tax or avoid it altogether.

That issues of tax cooperation and illicit capital flight are again firmly stated within a UN consensus document is something to build on. A failure to agree on strong commitments is a disappointment but this conference is another step towards ending tax secrecy and stemming the outflow of billions of dollars from the worlds poorest countries.

27th June 2009

More cracks in the wall of Babylon

26th June 2009

The following from today's Jersey Evening Post:

Jersey has plans to move to automatic exchange of tax information by 2011.

The Manx authorities have announced that they will move to automatic tax information exchange – a system which contrasts with this Island’s present approach based on signing Tax Information Exchange Agreements with separate jurisdictions – by July 2011.

However, Treasury Minister Philip Ozouf has revealed that Jersey is already committed to the introduction of automatic information exchange mechanisms by January 2011.

The Isle of Man’s announcement is seen as an attempt to pre-empt tougher disclosure rules that offshore financial centres could be forced to follow because of European Union initiatives.

Notoriously secretive jurisdictions such as Switzerland have already bowed to pressure for greater banking openness.

This in one to keep a very beady eye on.

G-20: reality check

Here's a take on the black / grey / white listing process:

And for the non-French speakers:

"we've made it to the grey list, but certain privileged clients can still enjoy the benefits of our black list services."

With thanks to Pétillon - the artist

UBS: to prosecute or not to prosecute

Our friend Tom Cardamone of the Task Force on Financial Integrity and Economic Development has written an interesting piece on UBS. It begins thus:

Tuesday’s New York Times piece saying that the Justice Department would soon drop its case against UBS was later retracted after a department spokesperson said there “no basis for the report.” How could this be? Did reporter Lynnley Browning – a 15 year veteran of the ink trade – get it wrong? Was her original source badly misinformed? Or was it a trial balloon by Justice? Hard to say unless you’re one of the principals.

You can read more here.

The UBS case has incredible significance. If the Department of Justice were to choose to drop its case against UBS, this would give the appearance of validating the behaviour of the UBS private bankers in explicitly breaking US law in order to serve their clients.

Prosecuting the case will provide immense momentum towards shattering the illusion (perpetuated by a tiny elite) that hiding their money from tax authorities is a right and an entitlement.

A successful prosecution would demonstrate immense progress towards a tipping point in the tax haven industry caving in on itself. So TJN says: no stepping back at this stage.

Simple arithmetic

Forgive us if we bang on a bit about the Oxford University Centre for Business Taxation literature review of studies into illicit financial flows, tax evasion and avoidance, but we have had to spend rather too much time fielding various enquiries from journalists who are plainly mystified by what Clemens Fuest and Nadine Riedel are trying to say.

This is partly a matter of poor writing and bad layout. No contents page for example. A dreadful numbering system. Too much academic economist-think of the type rightly criticised by the Post-Autistic Economics Network. Are Fuest and Riedel claiming there's no problem? How can they substantiate talk of drastic over-estimation when they have produced no evidence of their own to judge whether this might or not be the case? And so on.

Happily for us, most journalists seem to conclude the Oxford study is weak and might be conflicted by the links between the Centre for Business Taxation and UK big business. Whoops, perhaps Fuest and Riedel should have made a voluntary disclosure here since it doesn't look good, at all, if academics claim independence even when this simply ain't the case.

But earlier this afternoon another journalist put a different question to me. This journalist, an American, is familiar with the work of Martin Sullivan at Tax Analysts. Marty is a very well known writer on tax issues. He has quite independently attempted to assess the amount of tax evading capital held in selected secrecy jurisdictions. Here are his conclusions (originally published in Tax Notes International) for the British Channel Island of Jersey:

At the end of 2006, there were $491.6 billion of assets in the Jersey financial sector beneficially owned by non-Jersey individuals who were likely to be illegally avoiding tax on those assets in their home jurisdictions. We estimated the comparable figure for Guernsey to be $293.1 billion.

Holy schmoly. That's a serious amount of tax evasion. And the underlying analysis is published for all the world to see. How come Fuest and Riedel ignored it? And this for Switzerland:

Relying on the research described in the following pages, we conclude that at the end of 2006, $606.8 billion of assets in Switzerland's financial sector were beneficially owned by nonresident individuals who can easily avoid tax on those assets in their home jurisdictions because of the shortcomings in cross-border information reporting.

$500 billion here; $600 billion there; do the arithmetic and you can see for yourself that if all the other little and not so little offshore financial centres (think Big Daddy London, for example) are brought into the frame you're talking really big money. Especially when you include the massive volumes of Latin American capital held in US Treasury bonds and the vast amount of African capital held in the form of real estate across south-east England, south-east France, Miami, not to mention the various cantons of Switzerland.

I was in Montevideo recently, participating in a regional forum on the economic crisis, and I asked an Argentinean official whether he had any estimate of the volume of Argentinean capital held in Uruguay (you'll find rather a large 'private banking' industry in this country which still has banking secrecy on the statute books).
The official rolled his eyes extravagantly. "Tens of billions," he speculated, "hundreds of billions, maybe. Who knows. They've been playing this game for decades. Half of Punta del Este belongs to Argentineans, and they never declare it to anyone."

So the journalists question was simple. Why did Fuest and Riedel not also review the Tax Analysts studies of selected secrecy jurisdictions? Well I'll be blunt here. I replied that to my knowledge no attempt had been made to talk with the leading experts in this field (virtually every one of whom is known to us) and these studies have probably never registered on the radar screen in Oxford.

And there is another remarkable omission from the Fuest/Riedel review: what about the recent study of capital flight from Sub-Saharan Africa by Léonce Ndikumana and James Boyce? Another blank on the screen in Oxford, maybe, or perhaps they had no appetite for critiquing work coming out of University of Massachusets, Amherst.


The longer we reflect on this literature review the more evident it becomes that this is not a thorough piece of work.

John Christensen

PS Our friends at Eurodad did a review of the available data from World Bank and other sources. This is what they came up with (click on the image to enlarge). For those who haven't seen this publication, we'll be revealing its contents very shortly.

Young Conservatives: secrecy jurisdictions are the future

Be scared, be very scared.

If London Mayor Boris Johnson (pictured here for our international readers) represents the zeitgeist haunting the corridors of the student halls of residence in Britain (as is claimed here), and if the Conservative economic policies boil down to emulating the Cayman Islands and Jersey, the British general public faces a dire future.

This is what interviewee Matthew Clarke (an aspiring Young Conservative) has to say about the London Mayor:

"A lot of students now have posters of Boris Johnson on their walls whereas 20 years ago they had posters of Che Guevara. Boris Johnson is the new radical, he is the new cool, trendy person" (around 3 minutes into the clip)

Err, if you say so Matthew, but what's this about secrecy jurisdictions?:

I don’t believe in this zero-sum game where we look at the Cayman Islands and look at Jersey and we should say, well we’re going to cut you off and we’ll having nothing to do with you. What is it about those countries (sic) that makes them appealing places for companies to want to base themselves and how do we get them to base themselves here rather than there? (around 3 mins 30 seconds into the clip)

Little problem with your logic here, young Matthew. Go to the Cayman Islands, take a day trip to Jersey: you'll find that the companies aren't there apart from for tax avoidance and evasion purposes. What you will see are brass plates, the shadow banks, and the tax evading industry. That's what prompted President Obama (who, just for the sake of pedantry genuinely does feature on the student t-shirts and the walls of halls of residence) to say this.

TJN is a non-partisan organisation, and we will keep it that way. But it is notable that the British Conservative Party has kept well clear of international discussions about the role of secrecy jurisdictions in the current crisis, not to mention Britain's appalling role (see footnote) in promoting and protecting the criminal activities that these places facilitate.

Conservative leaders appear to have nothing to say on this subject, but this interview is revealing of thinking amongst the upcoming strands.

Footnote:

In due course we will be writing extensively about Britain's shocking role in promoting the development of secrecy jurisdictions in former British colonies and the British Crown Dependencies. We are in the process of completing a major archive research programme in London on this subject. I think its fair to say that we have damning evidence of how some government departments, including the then Overseas Development Ministry, heavily promoted tax havenry (a lovely term coined by government officials in the 1960s) despite the strong reservations of senior officials in other departments.

The revelation that some Conservatives want to base their economic policies on taking these disgraceful practices even further is frankly unbelievable. Not least because - as the collapse of the Turks and Caicos Islands demonstrates - such policies lead to economic,political and social disaster.

Thanks to Paul Sagar for drawing this to our attention.

A wunch of Swiss bankers

The interviewer leant forward and looked me in the eye.

"According to the Swiss Banker's Association" he said, "their members have no duty to collect taxes on behalf of other countries. What do you say about that?"

Despite the hour (this was an early morning recording session), and the cameras and the bright lights in my eye, I had to fight hard to suppress a giggle. Where do these bankers get this nonsense from?

"Well let's turn this argument on its head" I started. "If Swiss bankers don't want to collect withholding taxes from clients who are non-resident in Switzerland, they have a simple choice: sign up to the European Union's automatic information exchange process and allow their European neighbours to collect the taxes due for themselves."

"And anyway," I added, getting more fired up at Swiss sophistry, "these bankers can't moan about international pressures to tackle tax crime when they're responsible for encouraging the crime in the first place. They can argue 'til the cows come home, but most reasonable people understand that banking secrecy encourages people to act in a certain way."

The interviewer sat back in his chair and grinned.

For years bankers and other privileged elites have used obfuscation and mendacious garbage to disguise their criminal activities. Under open challenge their deceitful arguments simply fall apart.

"That's a take", said the producer.


John Christensen

More on the Yossarian Principle

Far better to be broadly right than exactly wrong goes the maxim. For economists of a reflective bent it is clear that the dismal science has failed, dismally, to the see the wood for the trees. Some of us think that the root of this failure might lie with the obsessive focus on modelling, which undoubtedly has a place in economics but becomes something of a distraction when data simply doesn't exist. In the absence of data, there tends to be a default towards assuming that something that cannot be quantified (and therefore cannot be modelled) cannot be proved one way or the other.

Its a bit of a no-brainer really that research into the operations of secrecy jurisdictions (which patently do exist and operate on an awesomle scale) is likely to be hampered by, well, secrecy. This has hindered analysis for decades. In 1982 I made a modest research proposal to a major development agency to examine the links between secrecy jurisdictions and development processes in poorer countries. The proposal was turned down precisely due to the lack of data from conventional sources (World Bank, IMF, OECD, etc). The board considering my proposal agreed there was an issue worth exploring, but concluded that no-one would take the issue seriously unless we could could come up with evidence based data from reliable sources.

This is the Catch-22 situation around which we have had to mould our research and advocacy activities: Secrecy jurisdictions create huge gaps in global capital market datasets, but the absence of data means that we cannot accurately prove the extent of these dataset gaps and therefore the issue is a non-issue. Even on those extraordinary occasions when data is published by independent organisations which all reasonable people would regard as reliable, we find that critics dismiss this data as "low quality".

The situation is not helped by the fact that secrecy jurisdictions act on behalf of the most powerful elites on the planet. The majority of these places fall under the protection of influential nations (Switzerland, United Kingdom, USA, to name just a few), well placed to block any pressure upon those who should be collecting reliable primary data (IMF, OECD, BIS, etc) to actually do their job.

More insidiously, however, too many of the world's supposedly independent academic research institutes, which might reasonably be expected to carry out their own data collection, have been captured by the same elites. Time and again I come across a highly placed professor of this that or the other who slyly fails to publicly declare that his/her post at such and such a reputed university receives significant funding from commercial sources, or makes implausible claims that their department will in no way be influenced by the fact that they receive truckloads of cash from big business. Conflicted? Nous?

Just prior to a meeting at the World Bank in 2005, I asked my colleague Raymond Baker what would be the best possible outcome from what I feared might be a dialogue of the deaf. His answer was perfectly straightforward: "John, I have only ever had one ask of the World Bank: go ahead and prove our estimates wrong by producing some of your own." Raymond has steadfastly ploughed this furrow for years, and time and time again the World Bank point blank refuses. Behind the scenes, of course, through quiet and sometimes not-so-quiet whispers, WB officials pooh-pooh our concerns (they're not alone in this) but despite being unable to come up with anything to plausibly refute our independent findings they still refuse to budge.

Yossarian would find this familiar territory.

On "strong" assumptions and other nonsense

A few weeks ago this blogger had the opportunity to debate at the Oxford Union alongside Michael Devereux, director of the Oxford University Centre for Business Taxation. Michael began his discussion by casting doubts on estimates of illicit financial flows, capital flight, tax evasion and secrecy jurisdictions, and generally downplaying the importance of these issues in a developmental context. He followed on by telling the audience that tax avoidance was the same as using tax exemptions granted by government, all of which left the audience (and this blogger) utterly perplexed about where he was coming from.

This begs a rather major question which Michael Devereux might be well placed to answer. Why have the related issues of illicit financial flows, tax evasion, tax avoidance, and the uses and abuses of tax havens been off-agenda for such a long time? Prior to becoming director of the Centre for Business Taxation Michael was associated with the International Monetary Fund, the very agency which should have been researching and combating these problems. And yet they didn't, and still don't. Which has left many of us with concerns about illicit financial flows, tax evasion, secrecy jurisdictions, etc, utterly perplexed about where the IMF is coming from.

As we blogged yesterday, the Oxford University Centre for Business Taxation has issued a report, strictly a review of the literature, on the subject of tax avoidance, tax evasion and tax expenditures in developing countries. And in the absence of any useful research emanating from the IMF, World Bank, and indeed academic bodies far better funded than we are, almost all of the literature under review here originates from civil society organisations, including our own Price of Offshore (published 2005); the 2000 briefing paper by Oxfam on tax havens titled Releasing the hidden billions for Development, to which this blogger contributed; Christian Aid's report on Death and Taxes; and our colleague Raymond Baker's Capitalism's Achilles Heel (reviewed here).

We know from many years of speaking with Raymond Baker and others with concerns about these issues, that we have been forced to produce estimates based on whatever datasets become available to us in order to challenge those institutions which should be taking these issues seriously (IMF et al) to produce estimates of their own. This important point does not come out in the Centre for Business Taxation's literature review, with the result that the authors have been highly critical of the failings of those who have attempted estimates, without stating our intentions (which have been very publicly voiced) of making the case for other institutions - especially the Bretton Woods institutions, to collate the necessary data and prepare studies of their own.

[As an aside, the World Bank is not entirely unaware of the gravity of the impact of tax evasion on developing countries. Its 2006 report on Poverty Reduction and Growth: Virtuous and Vicious Circles, which focuses on Latin America, reported that both on personal income tax and corporate taxation, almost all countries in the region are undercollecting, and it concludes "on the tax front, first item on the agenda would be strengthening anti-tax evasion programes and addressing the existing high level of exemptions." (p117)]

That said, and having re-read the literature review and heard Nadine Riedel from the Oxford University Centre for Business Taxation make a presentation of the findings earlier this week, there seems to be a current running through their work of seeking to downplay the issues, not just the illicit financial flows, or the tax evasion, but also the concerns about tax havens (we prefer the term secrecy jurisdiction, since contrary to the Dharmapala and Hines (2006) definition given on page 46 of the Oxford review, the majority of those who have attempted to define these places, including the OECD, are less concerned about prevailing tax rates for resident trading companies or indeed individuals, and instead focus on transparency issues like banking secrecy and effective information exchange, and ring-fenced preferential treatments directed at non-residents.)

Amongst other matters addressed in her presentation, Riedel spoke about the estimates of offshore holdings of financial assets, namely TJN's The Price of Offshore, which is described in the review itself as a "rough back of the envelope calculation based on ad hoc assumptions." Let me declare an interest: Richard Murphy was the lead author of The Price of Offshore, and I was involved from the outset and provided some of the "low quality data" Riedel refered to. The data came from Boston Consulting Group, and it cost a small fortune. Other data was sourced from the Bank for International Settlements, Merryl Lynch, and Ernst & Young Cap Gemini. None of them back street operators at the "low quality" end of the spectrum, or at least we don't think so.

Now here we run into a language issue. In their report, Fuest and Riedel say that we "combined" these different sources to arrive at the global figure. The use of the term "combined" is misleading since it implies aggregation, which was not the case. Put simply, by happenstance, in early 2005 we found ourselves with access to some very expensive data which included an estimate of offshore wealth holdings. And that data more or less coincided with data from two other independent sources. Et voila, we found ourselves in a position to do something that had previously not been possible: we could conduct what is known in social sciences as a data triangulation exercise. In order words, we could take three quite separate sources of data and see to what extent they converged on a data range.

Having done this triangulation exercise, and having arrived at a figure for liquid assets held offshore in the range of US$9 to 10 trillion, we still had a data gap to fill relating to other assets held in (highly secretive) entities like trusts. Such assets include real estate, works of art, yachts, private jets, and all sorts of very tangible assets which gain in value and are subject to taxation of one sort or another. There was no data to go by, but based on our own experiences of working offshore we assumed a low-side estimate of US$2 trillion (around 17 per cent of the value of all holdings). We now know from more recent discussions with other practitioners and my former colleague Colin Powell of the Jersey Financial Services Commission, that our figure was way too low: more realistically non-financial assets held in trusts, foundations, etc, are more likely to account for over 40 per cent of an HNWI portfolio.

But having cast doubt over data quality, Riedel also cast doubts (politely termed "caveats") on the assumptions we drew upon in our "back of the envelope calculation".

Assumption number one related to rates of return on a managed high-net wealth portfolio located in an offshore financial centre. We assumed a gross rate of 7.5 per cent a year. This figure was not plucked from thin air. Both Richard and I have contacts in financial centres in London, Jersey, Isle of Man, Monaco, Geneva, New York and elsewhere. 7.5 per cent was a reasonable rate of return to assume at that time. Do Fuest and Riedel want to challenge this?

Assumption number two is that a share of overall assets is owned by (fiscal) residents of developing countries. Now here I have the advantage over Riedel and her colleagues: I have worked as a practitioner in a secrecy jurisdiction (the British Channel Island of Jersey) and had clients from many poorer countries in the South. I have also worked in a number of poorer countries which suffer to a greater or lesser extent from illicit financial flows and tax evasion, including Algeria, Nigeria, and India. And there is no question about it: rich people in these countries use secrecy jurisdictions extensively, and it doesn't matter whether they are motivated by political factors (i.e. fear that appalling levels of wealth and income inequality might one day have terrible consequences) or whatever, the outcome of these wealth holdings being located offshore almost invariably includes tax evasion.

Importantly, in The Price of Offshore we did not attempt to quantify what proportion of the global total originates from poorer countries, partly because (and this is another point which Riedel and her colleagues did not pick up on) the US$11.5 trillion estimate we published has a major gap due to the complete absence of offshore holdings originating from Africa (Boston Consulting Group data scored a blank here).

The third assumption to be dismissed as "strong" (would Riedel et al please clarify whether they prefer their assumptions "weak"? or might the terms reasonable / unreasonable be preferable?) is that none of the income arising from offshore holdings is declared in the resident country. Well here they are just plain wrong. Based on many years of discussions with senior tax officials in many countries (UK, France, Ireland, USA, to name a few) we worked on the basis that some people declare this income (not many though!) and some income is liable to a withholding tax imposition (we applied a net rate of 7.5 per cent). We accommodated this by applying a very low marginal tax rate of 30 per cent, which contrasts with an average marginal rate estimate published by Forbes for fiscal year 2004 of 37.5 per cent. Reasonable? We think so. "Strong"? Whatever!

In other words, The Price of Offshore is not the back of the envelope calculation that Fuest and Riedel imply. It was based on many years experience (at the practitioner coal face) and a great deal of discussion with senior officials, wealth managers and others. If Fuest and Riedel had bothered to pick up the phone we would have been happy to explain how we arrived at our assumptions. But they did not attempt at any stage to discuss anything with us, and this might be indicative of why this literature review, and its recommendations, are so full of holes.

What can we say about the recommendations for future research? Well Richard Murphy's Tax Research blog has already said this. I would add that we would dearly love to have access to firm level data that would allow an estimate of the role of tax havens in corporate income shifting. Having a country-by-country reporting standard might be a major step in that direction. But the latter doesn't get a mention in the Centre for Business Taxation report, and for now we must continue to make use of whatever data comes our way, which is more than can be said for the brigade of nay-sayers who argue that in the absence of robust data there is no issue to be addressed.

To be continued.

Tax haven slide show

Forbes Magazine is running a slide show entitled In Pictures: 10 surprising tax havens

Take a look. And who might they have been talking to? (Clue: they won't be so surprising to readers of this blog.)

Academics have more to declare than their genius

The FT is running a most important comment piece today entitled Academics have more to declare than their genius . It starts like this:

"Crises always prompt an anguished and angry search for causes and culprits, and the current financial crisis is no exception. Fingers have been pointed at supine regulators, greedy bankers and investors, naive consumers and feckless politicians. One group, however, that has escaped careful scrutiny has been the academic community, particularly economics departments and business schools."

Well said. There is more:

"as the size and influence of the financial sector mushroomed in the past quarter-century, business schools and economics departments reaped a rich harvest. Money – and with it salaries, endowments and institutional power – moved in their favour.
. . .
A . . . troubling reason behind the failure of academics in the current crisis is the nature of their financial incentives and the resulting conflicts of interest – not dissimilar to what so many in Wall Street faced. Academics have stressed the critical importance of incentives in shaping human behaviour. But they have been reluctant to shine the light on how their own behaviour may be affected."

Who could doubt it? It adds:

"In recent years, the biological sciences have moved considerably to ensure greater transparency where there are potential conflicts of interest between research and financial remuneration, providing mechanisms for whistle-blowers to report conflicts of interest. Regrettably, these requirements are extremely weak in the social sciences and business schools."

We agree. We know that a number of different critics of TJN suffer from these particular incentive problems, some more obviously than others. Time for more transparency, anyone? (for the record, TJN's sources of funding are here - and the 2008 accounts, which are awaiting approval, will be made available shortly.)

Oxford University Centre for Business Taxation: a challenge to TJN

As some readers will already be aware, the Oxford University Centre for Business Taxation has published a report that is critical of a number of estimates published by TJN, Tax Research, Global Financial Integrity, Christian Aid, Oxfam, and others. This is good news, and it is what all of us have been aiming for: to provoke others into working in this area. The Oxford report, and our responses to it, will drive the debate forwards. What doesn't kill you makes you stronger, as the saying goes.

TJN is still preparing a set of responses to the report. So in the meantime, it would be useful to refer to a series of blogs by Richard Murphy, which are still in the process of being published on his Tax Research UK blog, which have started the ball rollilng.

So far, he has written blogs about:

• transfer mispricing here
• 60% of all global trade is through tax havens here
• The Price of Offshore here
• The Tax Gap and micro-level data here
• On economics, economists and economic research here
  

We will be bringing you more in due course.

Links - June 23

** Also see our searchable archive of past story summaries; and Offshore Watch **

Settlement Anticipated in UBS Case
June 22 (NYT) - The Justice Department may drop a closely watched legal case aimed at forcing the Swiss bank UBS to divulge the names of 52,000 wealthy American clients suspected of offshore tax evasion, a United States official briefed on the matter said Monday. The move could happen by mid-July.

OECD Upbeat on Tax Haven Progress
June 23 (Reuters) - Over these eight months, we have made more progress than in the last 10 years, says the OECD’s Angel Gurría. His
speech is here.

Cayman proposes greater hedge fund disclosure
June 22 (Reuters) - The Cayman Islands could make available data such as a fund's directors, manager, auditors and administrator, an executive said. Currently it only discloses information such as a fund's licence number, its regulatory classification and the date it was authorised.

French Government Forces Banks To Increase Transparency
June 23 (Tax News) Intensifying the pressure on its banks, the French government is introducing a new measure requiring all French banks to disclose information regarding their links to tax havens. Indeed, eager to make this compulsory measure widespread, the French government is expected to try to convince other countries to follow suit at the next G20 summit meeting.

Switzerland strikes tax deal with US
June 19 (Reuters) Switzerland and the United States have reached agreement on a double taxation treaty, the Swiss finance ministry said on Friday, a key step towards removal from a list of tax havens.

Al rescate de los paraísos fiscales: the G20 smokescreen
New book on tax havens by Juan Hdez. Vigueras, in Spanish

Sarah Lewis of TJN USA is speaking on the radio (click on NAPFE Radio Show). She is speaking in part-2 of that show.

Dutch press on with sale of Fortis tax arm
June 19 (FT) At a time when governments are launching a fierce assault on tax havens, the Fortis arm now owned by the Dutch government is pressing ahead with plans to sell a tax administration and structuring business.

Utah: A Case Study in Why States Should Reject a Flat Tax
June 19 (CTJ) - While the Wall Street Journal has been complaining (without cause) about Maryland's recent tax on millionaires, they neglected to mention what has happened to states who actually took their advice and implemented flat tax reforms. According to the editorial board of the WSJ, raising rates on top earners should cause them to flee the state in search of lower taxes, while instituting low and flat taxes should attract those same taxpayers. It seems recent developments in Utah have shown that this is simply not the case.

OECD Global Forum On Tax Transparency To Meet Sep 1-2
June 18 (WSJ) The Organisation for Economic Cooperation and Development said Thursday it plans to hold a meeting of its global forum on transparency and exchange of information Sept. 1-2. to discuss efforts to boost the sharing of tax data between countries.

New laws vital for OECD bid
June 18 (Miami Herald) Chile's bid to be the first South American member of the Organization for Economic Cooperation and Development by the end of this year could be dashed if lawmakers don't change bank secrecy laws ''as soon as possible,'' the OECD's legal chief said.

South Africa Investigates an Alleged Ponzi Scam
xJune 17 (WSJ), "South African police and financial regulators have joined forces to investigate a suspected Ponzi scheme that allegedly cost investors in several countries more than $1.2 billion, a Revenue Service spokesman said on Monday."

Multinationals to be forced to reveal tax bills
June 17 (Guardian) The UK is backing calls to force multi¬national companies to reveal precisely how much tax they pay in each jurisdiction they operate in. The move is being hailed as a significant breakthrough towards ending tax secrecy.

Indonesia's corruption court in fight for existence
June 17 (Reuters) It has put central bankers and government officials behind bars and is easily Indonesia's most feared judicial body. But the corruption court, an important weapon in the fight against graft, is now under threat itself.

Briton charged with Congo corruption
June 17 (FT) A police squad set up to tackle London's dire record on prosecuting over bribery overseas launched its first case against a British national yesterday.The City of London police anti-corruption unit said it had charged Patrick Orr, a solicitor, and two Dutch consultants over a $34m (£21m) United Nations deal to supply life-saving drugs to the Democratic Republic of Congo.

Govt may plug gaps in tax evasion laws
June 17 (Economic Times) The party could end soon for domestic and multinational companies that do tax planning only to avoid paying taxes in India.

Obama's offshore tax reforms prompt jitters in Ireland
June 16 (CS Monitor) President Obama launched his offshore tax reform proposals last month with a briefing note stating that Ireland, Bermuda, and the Netherlands accounted for nearly a third of all foreign profits reported by US corporations in 2003.

Swiss seek U.S. tax deal before UBS case continues
June 15 (Reuters) A looming court case against Swiss bank UBS AG (UBS.N) (UBSN.VX) could prove a stumbling block to the United States and Switzerland clinching a tax agreement this week.

Lloyds Bank hit by Obama tax purge
June 13 (Telegraph), "Lloyds Banking Group is ditching American customers based in Britain pending a crackdown on international tax evasion planned by President Barack Obama."

Congitive regulatory capture or heads on spikes?

Not long ago the bomb-throwing Financial Times columnist Willem Buiter denounced what he called the "cognitive regulatory capture" of the US Federal Reserve by Wall Street. And remember this, from Paul Krugman in May? Now we have Adair Turner, chairman of the UK's Financial Services Authority, saying this:

"Bankers and regulators are already showing signs of forgetting the lessons of the ”biggest financial crisis in the history of market capitalism. . . . Lord Turner said he had noticed ”aggressive” hiring of traders by investment banks had resumed, raising new fears of irresponsible pay deals."

And the FT added:

"The chairman of the Financial Services Authority also claimed there were signs that some countries were losing their zeal for radical regulatory reform. ”There’s a real danger we don’t seize the opportunities of this crisis,” he told the Commons treasury committee."

Very strikingly, another FT story adds this:

"Alexander Justham, director of the FSA’s market division, said the industry must understand that the idea that watchdogs should not be involved with those they regulated “at the early stages” – rather than letting firms largely self-regulate – was “just not acceptable” any longer.

“This is where society wants us to be. You should do the right thing and if you don’t you run the risk of having your head put on a spike. We are not intending to go to war with the industry but, equally, we and the industry are going to have to change,” Mr Justham said."

So part of the UK regulatory apparatus appears not to have been captured, at least from the way this man is talking. Imagine the City of London regulator saying "this is where society wants us to be" just a year or two ago. He would have been laughed out of his job. Change of the TJN type is certainly underway.

Still, there remains a real danger, in the current atmosphere of tentative of recovery, that lessons will be forgotten. A lack of zeal for regulatory reform would mean, among other things, that the offshore problem would be allowed to fester. The "green shoots" of recovery atmosphere, which would fuel to any "lack of zeal" remains a fragile thing, though: the FT added this today

"Growing pessimism about the prospects for a global economic recovery sent stock and commodity prices tumbling on Monday while new data showed that leading US corporate executives were cashing out of their share holdings at a rapid pace."

And there is anecdotal evidence such as this:

"Nearly one in six "prime" mortgages in the UK have fallen into negative equity, according to ratings agency Fitch. Households in Sunderland and Northampton are suffering most from the property crisis, it reveals."

Not to mention a handful of rather dire global growth forecasts currently doing the rounds. Many people believe that if there is indeed a recovery underway, it won't be a robust one. All we can say is: don't forget the lessons of what might have been - and still might be - the biggest economic crisis of our lifetime.

Symposium on Tax Justice in Dutch Senate

A guest blog from our colleagues at Somo in the Netherlands:

This week the Standing Committee on Finance of the Dutch Senate organised a Symposium on Tax Justice, aiming to create an opportunity to discuss and evaluate tax practice in the Netherlands from different perspectives and in an international context. The Symposium was divided into four sections, respectively on tax havens, bank secrecy and bank privacy, tax evasion and avoidance in relation to developing cooperation, and on tax planning in relation to Corporate Social Responsibility (CSR).

The occasion for the Symposium was the publishing of the book “Tax Justice – Putting Global Inequality on the Agenda” Francine Mestrum, one of the editors, presented the book to Dutch Deputy Minister of Finance Jan Kees de Jager and explained the consequences of tax evasion and avoidance for developing countries. This was a relatively isolated narrative in the symposium, since the other speakers did not consider the effects of tax matters on developing countries in their presentations - showing the absence of this aspect in the current international discussion.

In his opening statement, Mr. De Jager highlighted the importance of transparency and the efforts of the Dutch government to address the problem of tax havens by signing bilateral Tax Information Exchange Agreements (TIEAs - see more here.) He mentioned that the long-term goal of the Netherlands is to create a system of automatic information exchange.

Pascal Saint-Amans of the OECD also stressed the progress made on information exchange. He spoke of a new political momentum and stated that in February and March this year more had been achieved to increase transparency on tax than in the last 20 years. Both speakers focused on private money held in tax havens, leaving aside tax evasion and avoidance practices of multinationals. Albert Hollander, president of Tax Justice Netherlands, did bring up this issue and showed the opportunities for tax avoidance by multinational corporations that the Dutch tax system creates.

Eric Kemmeren, professor of Internal Tax Law at Tilburg University and an adviser for Ernst & Young, indicated it is time to change the tax system instead of fighting the symptoms of the current one. He explained a tax structure based on origin-based taxation of interest payments, presumed to reduce tax avoidance and to benefit developing countries (see more on source and residence taxation here.) He also argued that fair competition requires so-called ‘Capital and Labour Import Neutrality’ of taxes, that is, the taxes on a company should depend on where it operates, not on the nationality of its owners or workers. From this point of view, he argued that the new tax plans of Obama can be considered a step in the wrong direction.

Richard Happé, professor of Tax Law at Tilburg University, indicated that tax has become part of CSR, accelerated by scandals such as Enron or Parmalat. To him, good corporate citizenship is a matter of paying a fair share, which should be translated into transparency requirements and law. In contrast with Happé however, Jos Beerepoot, Head of Group Taxation of Unilever, was more reserved and stated the difficulties multinational companies face with regard to full transparency on paid tax on a country-by-country basis. He brought up the complexity and competitive sensitivity of tax information and stated his preference for better disclosure at the aggregate level.

For more information on the symposium, please see the website of the Senate (information in Dutch!) For the programme in English, please click here.

Soon the speakers' presentations, and a recording of the symposium, will be available on the Senate website too.

Ghana loses millions in uncollected taxes

What is the relation between taxation and development? Is revenue collected equally from all residents? Why should foreign investors be given tax concessions?

These and other questions are raised by a new Tax Justice Ghana Report, produced together with ISODEC, focuses on the ways in which the tax system and revenue collection are the biggest missing piece in national poverty eradication programmes. Download the printer-friendly version here, and the widescreen version here. The reports are written by Wilson Prichard of the Institute of Development Studies at the University of Sussex, with Isaac Bentum of A, A & K
Consulting.

Revenue mobilisation is at the top of the government's agenda, with a budget deficit reaching 11% in 2008. There are areas where revenue collection could be improved, for instance, taxing property and rental income could raise an additional 1-2% of GDP in taxes, while also increasing the regulation in land tenure.

The income tax, along with other direct taxes, is a key area where improved collection is needed. Indeed the income tax should be renamed the “development tax”, as it has the greatest missing capacity, regulates private sector activities, and redistributes income.

Ghana’s investment policy relies heavily on tax holidays, while serious efforts to monitor and evaluate their benefits are lacking. Companies often receive a 10-year tax holiday when establishing in the Free Zones. The whole regime of Free Zones needs urgent review in Ghana, as for instance, it has been found that 72% of forestry turnover is subject to Free Zone status, making a revenue loss of 0.5% of GDP.

Extractive industries account for 4.6% of Ghana’s GDP, while contributing approximately 3.3% of government revenues. Using existing provisions, royalties could be charged at a higher rate (up to 6% provision in the current law), instead of the current lowest rate of 3% being used across the board. Income taxes could also be collected from expatriate workers.

The establishment of an International Financial Services Centre (IFSC) in Accra will make Ghana into a tax haven. If and when the second bill constituting the legal framework is passed, money from the region will start flowing in hampering efforts to fight corruption, tax collection and the drug trade in the region.

While there is much talk about future oil revenues bumping government revenues as early as in 2010, relying on oil to solve the revenue problem is not advisable. The recent oil price fluctuations demonstrate that you can’t rely on oil revenues for current spending. Instead, a broad-based and well-enforced tax system will tackle the budget short falls, and safeguard against abuses in all areas.

This report is the start of a whole series of country reports, which look into the tax justice issues from a national angle with a view to build tax advocacy work in all continents.